Tradelink Electronic Commerce Limited (HKG:536) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Tradelink Electronic Commerce (HKG:536) has had a great run on the share market with its stock up by a significant 23% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Tradelink Electronic Commerce's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Tradelink Electronic Commerce

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Tradelink Electronic Commerce is:

20% = HK$68m ÷ HK$340m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.20 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Tradelink Electronic Commerce's Earnings Growth And 20% ROE

At first glance, Tradelink Electronic Commerce seems to have a decent ROE. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. Given the circumstances, we can't help but wonder why Tradelink Electronic Commerce saw little to no growth in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Tradelink Electronic Commerce's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 11% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Tradelink Electronic Commerce fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tradelink Electronic Commerce Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 96% (meaning, the company retains only 3.6% of profits) for Tradelink Electronic Commerce suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Tradelink Electronic Commerce has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

Overall, we have mixed feelings about Tradelink Electronic Commerce. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. You can do your own research on Tradelink Electronic Commerce and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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